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WORKING CAPITAL MANAGEMENT IN THE BANKING SECTOR: BANKING FINANCE PROJECTS
ABSTRACT
Working capital is known to be the background and life wire of any business organizations in every part of the world. This makes it imperative that there should be efficient working capital management, to help in reducing constant incidents/cases of banks distresses (i) Banking industry since this has been a source worry to the users of financial statements. Consequently this project has attempted to give an expository discussion on the management of working to enhance the continuity industry to enhance the continuity of banking industry, with a particular interest in united bank for Africa plc Surulere, lagos.
It thus gave hits on how bank managers should manage financial distress banks where such signs of distress situations tries to occur.
Conclusions arising form this research are both outstanding and helpful too.
CHAPTER ONE
INTRODUCTION
1.1 BACK GROUND OF THE STUDY
Working capital management is vital in the management of the bank’s current account which include current assets and current assets and current liabilities. This explains the various forms of current assets and current liabilities adjustments which a bank can make in order to meet its required working capital. Working capital is of two types, gross type and net type.
The gross type refers to the bank’s investments in current assets, this means those assets which can be means those assets which can be converted into cash within accounting year, like short term securities, debtors bills receivable, stock and cash.
The net type is the difference between current assets and current liabilities. Current liabilities means those claims of outsiders which are expected to mature for payment within an accounting year, such as creditor, bank overdraft and bills payable. Net working capital occurs when current assets exceeds current liabilities.
Working capital management is one of the important aspects of the bank’s overall financial management. This is because efficiency in this area is necessary in order to ensure the bank long-term success and achieve its overall goal which is the maximization of owners wealth.
A certain level of working capital is required for operation in the banking industry. This level of working capital of a bank constitutes the cash holding or near cash holding or near cash assets required of a bank by a statue of the government or it should be noted however, that the level of working capital do not directly earn the bank any income when it is all allowed to be held in cash form, that is idle cash.
The main purpose of establishing commercial banks to operate is to make profit for the shareholders. In that regards, banks as well as other profit seeking enterprises strive to increase their net income and presence value of their assets. While recognizing this, the immediate concern of the bank manger is to provide satisfactory returns for the shareholders, and this requires holding a sufficient volume of safe and productive assets as well as sourcing for funds through the fast volatile and expensive available sources.
It should be noted however, that a bank does not possess full control over its assets and also a greater part of its liabilities, the reality it that it possesses partial control on some current assets and current liabilities absolute control on some and still lack total control over others. It is within this business environmental constraints and prospect that banks have to carry out their various adjustments to suit their long run objectives objectives.
In the earlier paragraph, it was mentioned that there are two concepts of working capital (the gross and net working capital ) They have equal significance from the management view point, the gross working capital concept focuses attention on the two aspects of current asset management.
(a) optimum investment in current assets
(b) Financing current assets.
The consideration of the level of investment in current assets should avoid two danger points, the excessive and inadequate investment on assets. The investment in current assets should be in adequate form to enhance better performance. While the excessive investment in current asset should be avoided because it impairs a bank’s profitability since idle investment earns nothing to the investor.
On the other hand, inadequate availability of working capital can threaten the solvency of the bank when it fails to meet its current obligations. Thus the financial managers should have knowledge of the source of working capital funds as well as the investment avenues, where the idle funds may be temporally invested. The net working capital on the other hand has indicated liquidity position and suggests that current assets should be sufficiently in excess of current liabilities in order to constitute a margin for maturing obligations within the ordinary operation cycle of a bank’s business.
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